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Quest Diagnostics (DGX) Tops Q3 Earnings, Narrows View

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Quest Diagnostics’ (DGX - Free Report) third-quarter 2016 adjusted earnings per share (EPS) of $1.37 came in 2 cents ahead of the Zacks Consensus Estimate and exceeded the year-ago number by 7%.

Adjusted EPS in the reported quarter excludes the gain from the sale of the company's Focus Diagnostics products business, charges related to retirement of debt and related refinancing as well as restructuring and integration costs. Reported EPS in the third quarter came in at $1.34, representing a year-over-year plunge of 42.9%.

Reported revenues for the third quarter inched up 0.3% year over year to $1.89 billion, while remaining in line with the Zacks Consensus Estimate. The year-over-year comparison has been adjusted taking into consideration the company’s strategic divestitures (Celera and Focus diagnostics) in order to refocus on core diagnostic information services.

QUEST DIAGNOSTC Price, Consensus and EPS Surprise
 

QUEST DIAGNOSTC Price, Consensus and EPS Surprise | QUEST DIAGNOSTC Quote

Volume (measured by the number of requisitions) increased 2% year over year. Revenue per requisition was flat year over year. Diagnostic information services revenues in the quarter grew 2.1% on a year-over-year basis.

Among operating costs, cost of services during the reported quarter was $1.16 billion, down 0.4% year over year. Gross margin came in at 38.6%, up 43 basis points (bps) year over year.

Selling, general and administrative expenses increased 1.7% to $409 million in the reported quarter. Adjusted operating margin showed an improvement of 12 bps to 16.9%, with a 0.9% rise in adjusted operating income to $319 million.

Quest Diagnostics exited third-quarter 2016 with cash and cash equivalents of $406 million, which marked a 43.4% surge from second-quarter 2016. Year to date, net cash provided by operating activities was $765 million compared with $549 million in the comparable year-ago period.

Through the first nine months of 2016, the company repurchased 5.7 million shares for $440 million including 3.1 million shares repurchased under an accelerated share repurchase agreement during the second and third quarters of 2016 for $250 million. Quest Diagnostics is currently left with $532 million of authorization under the approved share repurchase plan.

Outlook

Quest Diagnostics has narrowed its previously provided 2016 revenue guidance. The company currently expects full-year revenues to be $7.51 billion compared to the earlier range of $7.47–$7.54 billion. This reflects a 0.5% increase over 2015 reported revenues (2.5% growth over 2015 on an equivalent basis). The current Zacks Consensus Estimate for revenues is pegged at $7.52 billion, just above the guidance range.

In addition, the company’s 2016 adjusted EPS expectation range has been narrowed to the range of $5.07–$5.12 from the earlier provided range of $5.02–$5.17. The Zacks Consensus Estimate of $5.10 remains within the guided range.

Operating cash flow for 2016 is expected to reach $1 billion (unchanged). The current estimate for capital expenditure has been narrowed to $250 million from the earlier range of $250–$300 million.

Our Take

Quest Diagnostics’ third-quarter earnings duly exceeded the Zacks Consensus Estimate while revenue remained in line with the same. The company is currently refocusing on its core diagnostic information services business and working on delivering disciplined capital deployment.

We are also highly optimistic about the company’s focus on continued execution of its five-point strategy. According to Quest Diagnostics, its planned divestiture of the Focus Diagnostics products business is part of this broader strategy to refocus the same on diagnostic information services.  In addition, several new relationships with hospitals and integrated delivery networks were the other growth drivers.

However, over the past several quarters, the overall soft industry trends, leading to a low volume environment, have acted as a dampener for the company.

Zacks Rank

The stock presently carries a Zacks Rank #3 (Hold). Some better-ranked players in the broader medical sector are Almost Family Inc. , Laboratory Corp. of America Holdings (LH - Free Report) and The Cooper Companies Inc. (COO - Free Report) – all carrying a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Almost Family has gained 9.99% year to date, much better than the S&P 500’s 4.9% over the same period. The company’s next 5-year earnings growth expectation stands at 15%, higher than the industry average of 13.2%.

Cooper has seen seven estimates moving higher for the current fiscal over the past 60 days, compared to one downward movement. Accordingly, earnings estimates for the year have moved up by 0.4% to $8.42 per share. The stock recorded a gain of 33.4% year to date.

LabCorp’s earnings estimates for 2016 have moved up by 0.23% to $8.81 per share over the last three months. The company has an impressive earnings growth rate of 10.3% for the current fiscal. Year to date, the stock has performed better than the S&P 500, with a gain of 11.6%.

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